Wall Street Strip

Is Paulson's bailout bill unconstitutional?

Does the Constitution have any role in the intense debate and blowback surrounding Secretary Henry Paulson's $700 billion bailout proposal? There is nothing in our founding document that prohibits taxing Peter (us) to pay Paul (Wall Street). There are constitutional principles, however, that speak to values such as oversight and transparency. Our system of checks and balances abhors a blank check.

And yet Secretary Paulson's proposal contains a sweeping provision that utterly strips the courts of any power to review his decisions. Section 8 of the Paulson proposal reads: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

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In contrast, an alternative bailout bill, sponsored by Democratic Sen. Chris Dodd of Connecticut, has a very different clause. The Dodd proposal reads: "Any determination by the Secretary with regard to any particular troubled asset pursuant to this Act … shall not be set aside unless such determination is found to be arbitrary, capricious, an abuse of discretion, or not in accordance with the law." In other words, the Treasury secretary's determinations can be challenged on legal grounds. The Dodd version goes on to recite that "the terms of a residential mortgage loan that is part of any purchase by the Secretary under this Act shall remain subject to all claims and defenses that would otherwise apply notwithstanding the exercise of authority by the Secretary or Corporation under this Act."

How do these two alternatives stack up, constitutionally speaking? In Paulson's defense, there is no absolute constitutional prohibition on so-called "court-stripping" laws—provisions that bar judicial review of decisions by executive-branch officials. To the contrary, there is explicit language in the text of the Constitution that appears to grant Congress authority to control the jurisdiction of federal courts. The Constitution's Exceptions Clause describes the appellate jurisdiction of the Supreme Court, with the trailing language, "with such Exceptions, and under such Regulations as the Congress shall make." And the lower federal courts are entirely creatures of Congress: The Constitution only created the Supreme Court, leaving to the legislature the option to create lower courts as it deemed wise. The greater power to bring lower federal courts into existence implies the lesser power to place limits on the scope of cases they may hear. Finally, the Supremacy Clause, which makes federal law the supreme law of the land, trumping state laws, presumably gives Congress the power to insulate from state-court scrutiny the actions of federal officials who are enforcing laws passed by Congress.

It's relatively rare for Congress to pass laws stripping courts of all power to review actions of administrative agencies. But it does happen from time to time, and courts have upheld some of these laws. On the other hand, courts are especially skeptical of laws that preclude judicial review of claimed violations of constitutional rights. For example, the Supreme Court's decision this summer involving the Guantanamo Bay detainees,Boumediene v. Bush, held that the Bush administration's effort to deny the detainees access to federal court by taking away their right to the writ of habeas corpus was unconstitutional. In Boumediene, the court could rely on specific language in the Constitution's Suspension Clause, which forbids suspension of the writ except when "in cases of rebellion or invasion the public safety may require it."

Secretary Paulson's proposal doesn't mess with habeas corpus. But its breathtaking sweep would prevent a litigant from raising constitutional objections to his actions. You could imagine, for example, a suit claiming that the Treasury Department had engaged in a taking of property without just compensation or had deprived people of property without due process of law (neither is allowed under the Fifth Amendment). Or a litigant could sue Treasury for acting so arbitrarily or irrationally that his actions violated the 14th Amendment's Equal Protection Clause.

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In contrast, Sen. Dodd's proposal includes a well-balanced provision for judicial review. His proposal would subject the Treasury secretary to the normal standards customary in American administrative law. Courts would not be permitted to substitute their judgment for that of the secretary—that's the part about how Treasury would only be on the hook for a decision that was arbitrary, capricious, or an abuse of discretion. But courts could be called upon to police such an abuse or a departure from the rule of law. That, of course, is their traditional role.

Those who advocate for a bailout this week often conjure the dismal economic history of the Great Depression. There's an apt legal parallel here as well. Many of the early laws passed at the behest of the Roosevelt administration during the New Deal were struck down by the Supreme Court precisely because they violated norms of checks and balances. While we have come to caricature those Supreme Court decisions as the shortsighted backlash of nine old curmudgeons who reflexively opposed the socialistic tendencies of the New Deal, perhaps it is worth remembering that the constitutional principles they invoked were grounded in the elemental balance struck by the framers. These principles are that Congress should pass laws based on intelligible policy judgments and not (literally) pass the buck to the executive branch, that executive-branch officials should administer laws subject to the guidance of Congress, and that courts exist to review the legitimacy of both.

I do not suggest that it is by any means certain that a court would strike down the Paulson bill as it's now written. But it is certain that this bill is in powerful tension with our system of checks and balances and that its constitutionality would be subject to grave doubt. Why take a chance? It was a lack of transparency and accountability that created the crisis in credit markets. That was itself a departure from the wisdom of the framers. Let's not depart again.

Rod Smolla is dean and Steinheimer professor at the Washington and Lee University School of Law.